We are witnessing conflicting approaches from the Democrats and Republicans to stimulate the U.S. economy, which has clearly slowed down again. After significant growth in both the 4th quarter of last year and the 1st quarter of this year, the U.S. economy experienced dramatically slower growth in the 2nd quarter and it appears that the 3rd quarter will also be below a growth rate that would have an impact on the stubbornly high unemployment rate of 9.5%-9.6%. After a round of speeches by President Obama this past week built around Labor Day touting a combination of new infrastructure projects and tax incentives to get the economy moving, he ended the week with a press conference on Friday, where he seemed to leave some room for negotiation with the Republicans on the soon-to-expire Bush tax cuts. The Wall Street Journal reported over the weekend: “President Barack Obama muddied the debate over the extension of tax cuts for the wealthy on Friday, suggesting that ‘certainly there’s going to be room for discussion’ of the topic if Republicans and Democrats agree first to extend tax cuts for the middle class.” [WSJ 9/11/10, Tax-Cut Debate Becomes Cloudier (Weisman & Meckler)]
I would like to propose, as many others have, that a 2-year extension for all tax brackets would make the most sense during this recovery. It would also demonstrate that the administration is willing to compromise with the Republicans, who for now are the minority party in the House and Senate, but appear to have very good odds to once again become the majority party in the House after the midterm elections.
Earlier this week in the New York Times’ Op-Ed page, Peter Orszag wrote: ”In the face of the dueling deficits, the best approach is a compromise: Extend the tax cuts for two years, and then end them altogether. Ideally, only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it. Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned. Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.” (NY Times 9/6/10) Orszag, who recently left the Obama administration, where he was the director of the White House Office of Management and Budget, is an adherent of sound fiscal policy and remains committed to bringing down the deficit in the medium and long term, but he clearly understands that the time for compromise on tax measures is now.
Now for the proposal: On August 31st, shortly after President Obama had New York City Mayor Bloomberg join him on his vacation on Martha’s Vineyard for a round of golf, the New York Post reported that the President had sounded out the Mayor on taking over as Treasury Secretary from Tim Geithner. (NY Post 9/1/10) In the past week there was further speculation but no forthcoming announcements. I personally believe that if the President could persuade either Mike Bloomberg or Jamie Dimon, CEO of JPMorgan Chase (JPM) to join his administration, or better yet both of them, perhaps one at Treasury and one at Commerce, he would demonstrate he was much more in tune with the concerns of the business community, which up until now has felt deserted by the approach of constantly placing blame for the Great Recession and the slow recovery on them. In the end, jobs in significant numbers will be created and the unemployment rate will come down when our largest enterprises have the confidence to start hiring and expanding once again. This approach combined with innovation from our venture capital-backed companies can enable us to reignite the growth engine that is needed to restore confidence in both political parties and Washington.
A similar approach is already underway in the U.K., where earlier in the week it was announced in London that Stephen K. Green was stepping down as the chairman of HSBC (LON:HSBA) to join the British government as minister for trade and investment. (NY Times, 9/8/10) Prime Minister David Cameron stated, “I am delighted to appoint Stephen to this vital role. With Stephen’s experience and expertise, I know he will make an invaluable contribution towards this crucial agenda, helping to drive strong economic growth in the U.K.”